A Terminated Massachusetts Employee of a Delaware Corporation May Bring a Claim in the Massachusetts Courts That He Couldn't Bring in Delaware
Plaintiff George Clemmer was terminated in 1999 as an employee of LiveData, a closely held Delaware software company doing business in Massachusetts. Clemmer was also, and has remained, a minority shareholder and director of the company. Clemmer sued LiveData and others in Massachusetts Superior Court alleging that he had been wrongfully frozen out as a shareholder based on the loss of his position as an employee. While Massachusetts courts may recognize such a claim when brought by a shareholder in the close corporation context, Delaware does not. On this basis, the Superior Court, applying Delaware law, allowed LiveData’s motion to dismiss. Clemmer appealed, and while the Massachusetts Appeals Court agreed that Delaware law applies, the Court nevertheless reversed, holding that Clemmer had in fact stated a viable freeze-out claim under Delaware law.
Concerned that the Appeals Court appeared to have misinterpreted important Delaware precedents, NELF undertook direct representation of LiveData in the filing of an application for further appellate review by the Massachusetts Supreme Judicial Court (“SJC”). In its brief, NELF laid out for the Court the Delaware decisions clearly establishing that Clemmer has no claim as a shareholder under Delaware law for freeze-out, or for any other breach of fiduciary duty, based on his termination as an employee. NELF also reminded the Court of its own statement in Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001), which applied Delaware law to a minority shareholder’s termination claim, that “Delaware law does not impose the heightened fiduciary duty of utmost good faith and loyalty on shareholders in a close corporation.” NELF was concerned that the many Delaware close corporations based in Massachusetts should be able to rely on this fundamental principle of Delaware law in litigation, even if brought in the Massachusetts courts. Under Delaware law, shareholders in close corporations must bargain for the heightened fiduciary duties recognized under Massachusetts law, such as through a shareholder or employment agreement, or by agreeing to incorporate as a Delaware statutory close corporation. Clemmer did not pursue any of these protections.
On December 1, 2004, the SJC denied NELF’s application for further appellate review, Clemmer v. Cullinane, et al., 442 Mass. 1113 (2004), thereby effectively affording Clemmer a basis for recovery that he never bargained for and that Delaware has refused to recognize. Moreover, by rejecting NELF’s request for further appellate review, the SJC leaves unresolved whether the Appeals Court simply made a factual error in this case or was signaling an unwillingness by Massachusetts courts to enforce Delaware’s freedom-of-contract approach to the rights of shareholders in close corporations.
Plaintiff George Clemmer was terminated in 1999 as an employee of LiveData, a closely held Delaware software company doing business in Massachusetts. Clemmer was also, and has remained, a minority shareholder and director of the company. Clemmer sued LiveData and others in Massachusetts Superior Court alleging that he had been wrongfully frozen out as a shareholder based on the loss of his position as an employee. While Massachusetts courts may recognize such a claim when brought by a shareholder in the close corporation context, Delaware does not. On this basis, the Superior Court, applying Delaware law, allowed LiveData’s motion to dismiss. Clemmer appealed, and while the Massachusetts Appeals Court agreed that Delaware law applies, the Court nevertheless reversed, holding that Clemmer had in fact stated a viable freeze-out claim under Delaware law.
Concerned that the Appeals Court appeared to have misinterpreted important Delaware precedents, NELF undertook direct representation of LiveData in the filing of an application for further appellate review by the Massachusetts Supreme Judicial Court (“SJC”). In its brief, NELF laid out for the Court the Delaware decisions clearly establishing that Clemmer has no claim as a shareholder under Delaware law for freeze-out, or for any other breach of fiduciary duty, based on his termination as an employee. NELF also reminded the Court of its own statement in Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001), which applied Delaware law to a minority shareholder’s termination claim, that “Delaware law does not impose the heightened fiduciary duty of utmost good faith and loyalty on shareholders in a close corporation.” NELF was concerned that the many Delaware close corporations based in Massachusetts should be able to rely on this fundamental principle of Delaware law in litigation, even if brought in the Massachusetts courts. Under Delaware law, shareholders in close corporations must bargain for the heightened fiduciary duties recognized under Massachusetts law, such as through a shareholder or employment agreement, or by agreeing to incorporate as a Delaware statutory close corporation. Clemmer did not pursue any of these protections.
On December 1, 2004, the SJC denied NELF’s application for further appellate review, Clemmer v. Cullinane, et al., 442 Mass. 1113 (2004), thereby effectively affording Clemmer a basis for recovery that he never bargained for and that Delaware has refused to recognize. Moreover, by rejecting NELF’s request for further appellate review, the SJC leaves unresolved whether the Appeals Court simply made a factual error in this case or was signaling an unwillingness by Massachusetts courts to enforce Delaware’s freedom-of-contract approach to the rights of shareholders in close corporations.
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